Circuit decisions are rare where the concurrence is more significant than the panel opinion. In a bankruptcy that has already generated gobs of law at all levels, Sixth Circuit Judge Jeffrey S. Sutton mused on the notion that veil piercing and alter ego shouldn’t apply to trusts.
Having purchased claims belonging to a bankrupt estate, the plaintiff sued the debtor and myriad closely held corporations and trusts with which the debtor was connected. The complaint alleged theories that included reverse veil piercing and reverse alter ego. In other words, the plaintiff believed that the corporations and trusts should be made responsible for the debtor’s debts.
After trial in district court, the plaintiff won some and lost some. The trustee prevailed on fraudulent transfer claims regarding the transfer of money to a trust account and a transfer of real property to a trust.
However, the district court dismissed all claims based on reverse veil piercing and reverse alter ego, where the plaintiff was hoping to tag trusts with liability for the debtor’s debts. The plaintiff appealed.
Without laying out the details, suffice it to say that the Sixth Circuit affirmed in a January 21 opinion by Circuit Judge Alan E. Norris. Among other things, he made a so-called Erie guess by concluding that the Tennessee Supreme Court would not recognize a theory of reverse piercing in the context of a trust and its beneficiary. He said that Tennessee had only sanctioned reverse piercing between a corporate parent and its subsidiary.
The two-page concurrence by Judge Sutton will make you sit up and take notice. He began by stating his “discomfort” with the idea of “importing” veil piercing and alter ego theories into trust law. He said that both “originate in corporate law, and both concepts should stay there.”
Trusts and corporations are different animals, in his view. A corporation is a type of legal entity, whereas a trust is a fiduciary relationship among several people.
If a corporation uses limited liability for wrongful purposes, courts might pierce the corporate veil or treat the corporation and its shareholders as alter egos, Judge Sutton said. He acknowledged that the Eighth and Tenth Circuits had applied the concept to trusts.
Judge Sutton said he was “dubious.” He asked, “How could one ‘pierce the veil’ of a trust?” As a “non-entity,” he said, “a trust can’t be a ‘self’ of any sort . . . .”
Rather than attempt to pierce the veil of a trust, “perhaps the plaintiff only means to challenge the creation of the trust,” Judge Sutton said. And in the case of an alter ego claim, perhaps “the plaintiff means only to allege that the trustee is the beneficiary’s alter ego,” he said.
Judge Sutton had a simple answer to the problem of nomenclature. The better “view,” he said, is “to call a problematic trust what it is: invalid because ‘its purpose is unlawful,’” citing the Restatement (Third) of Trusts.
Given that trust law “has a vocabulary of its own,” Judge Sutton warned that departing from it “invites confusion.” Regardless of what some states may do, he believes that veil piercing and alter ego “should have nothing to do” with trusts.
Circuit decisions are rare where the concurrence is more significant than the panel opinion. In a bankruptcy that has already generated gobs of law at all levels, Sixth Circuit Judge Jeffrey S. Sutton mused on the notion that veil piercing and alter ego shouldn’t apply to trusts.
Having purchased claims belonging to a bankrupt estate, the plaintiff sued the debtor and myriad closely held corporations and trusts with which the debtor was connected. The complaint alleged theories that included reverse veil piercing and reverse alter ego. In other words, the plaintiff believed that the corporations and trusts should be made responsible for the debtor’s debts.
After trial in district court, the plaintiff won some and lost some. The trustee prevailed on fraudulent transfer claims regarding the transfer of money to a trust account and a transfer of real property to a trust.
However, the district court dismissed all claims based on reverse veil piercing and reverse alter ego, where the plaintiff was hoping to tag trusts with liability for the debtor’s debts. The plaintiff appealed.
Without laying out the details, suffice it to say that the Sixth Circuit affirmed in a January 21 opinion by Circuit Judge Alan E. Norris. Among other things, he made a so-called Erie guess by concluding that the Tennessee Supreme Court would not recognize a theory of reverse piercing in the context of a trust and its beneficiary. He said that Tennessee had only sanctioned reverse piercing between a corporate parent and its subsidiary.